Schwab Announces Zero Commission Stock Trades--E*Trade and TD Ameritrade Tanking

[marko]

You still "own" the stock, on paper, but the brokerage has done all sorts of arbitrage with it. After all they don't offer you $500 $1000 $2000 to move your account to them, and then give you $0 commission trades, just to be nice. Big bucks are being made with your wealth. This has all worked for decades, but someday the music will stop.

So this is essentially an IOU, where they monitor my stock price and pay me accordingly (dividends and eventually the sell price) but I never really owned the stock per se?

Can I assume that also applies to MFs? I'm fine with them making money off of my money, but I always thought that I physically owned the shares I was buying; that if I called the company directly (JNJ, XOM, PG) they would be able to fine my name somewhere as a small share holder. No?

In the (very) old days, didn't you get a certificate from the company who's shares you bought saying that you were a shareholder?

[mind blown]

 

[gwraigty]

One news article said that TD Ameritrade will release the details of the new pricing structure tomorrow. It'll apply to the retail and RIA platforms. I'm anxious to find out if it will also apply to the SDBAs. DH's Vanguard VBO assets have just been transferred to TDA SDBAs, currently awaiting allocation of the Roth portion to the Roth SDBA, with trading to be allowed starting next week.

At Vanguard, they didn't extend their commission-free ETF pricing to the VBO accounts. The $7 commission for non-Vanguard ETFs applied, which was worth paying for choices I liked better. So I hope that TDA doesn't shut the SDBA's out of this like Vanguard did.

 

[GrayHare]

Regardless of the arbitrage, stock shares remain committed to you so that you, for example, can exercise your voting rights. It's like an apartment conmplex. There's an owner, but the owner's property can be rented out.

As you probably know, with MFs you do not have voting rights of the shares held by the MF. I am uncertain whether a MF actually directly holds all the shares it claims to. I suspect the MF holdings are similarly leveraged and arbitraged in order to make money off the underlying securities.

AFAIK, when you hold the physical stock certificates of a given company, such arbitrage is not possible.

 

[gwraigty]

So this is essentially an IOU, where they monitor my stock price and pay me accordingly (dividends and eventually the sell price) but I never really owned the stock per se?

Can I assume that also applies to MFs? I'm fine with them making money off of my money, but I always thought that I physically owned the shares I was buying; that if I called the company directly (JNJ, XOM, PG) they would be able to fine my name somewhere as a small share holder. No?

In the (very) old days, didn't you get a certificate from the company who's shares you bought saying that you were a shareholder?

[mind blown]

Street name is explained in detail here:

In Street Name Definition

There's no reason to be concerned about any of this.

 

[NW-Bound]

While trade commissions made up 7% of Schwab's revenue, they expect only 3% to 4% hit with this move to free trade. Apparently, they expect to make up part of it somehow.

If one wonders how Schwab makes money, let's compare their AUM (assets under management) and gross revenue to those of some banks.


Schwab: AUM of $3.25 trillion, gross revenue of $10.1 billion (0.3%)
JP Morgan: AUM of $2.73 trillion, gross revenue of $109 billion (4%)
Bank of America: AUM of $2.35 trillion, gross revenue of $91 billion (3.9%)

So, obviously Schwab's business is not as lucrative as that of banks.

 

[GrayHare]

So, obviously Schwab's business is not as lucrative as that of banks.

This is a temporary condition while the Treasury supports US banks. Check out the numbers from before such Treasury support and they won't look as rosy for banks.

 

[kcowan]

AMTD has continued to decline today. Looks like the only winners will be us traders?

 

[marko]

Street name is explained in detail here:

In Street Name Definition

There's no reason to be concerned about any of this.

Thanks for the insights. I'm not concerned as it seems there is a ton of oversight etc. I just find the whole thing very, very enlightening!

I just never thought too much about it, however I must admit at one point long ago that the thought had crossed my mind if, indeed they actually bought the stock for me or if it was a paper transaction.

 

[gwraigty]

I don't do Twitter, but I read that customers are tweeting E-Trade and Fidelity, demanding they do the same. E-Trade is hinting that some change are forthcoming. Fidelity is not. So far.

 

[ESRwannabe]

So much for Robinhood...

Does anybody know how well Schwab’s mobile app works for trading?

That was another thing that impressed me with Robinhood. Their mobile app is well designed. It’s easy to use for researching and initiating trades.

Schwab's mobile app is nice and easy to use. I like that you can take photos of checks to deposit money too.

 

[gwraigty]

Well, that didn't take long:

E-Trade drops commissions on trades, joining Schwab, TD Ameritrade in brokerage fee war

 

[gwraigty]

One news article said that TD Ameritrade will release the details of the new pricing structure tomorrow. It'll apply to the retail and RIA platforms. I'm anxious to find out if it will also apply to the SDBAs. DH's Vanguard VBO assets have just been transferred to TDA SDBAs, currently awaiting allocation of the Roth portion to the Roth SDBA, with trading to be allowed starting next week.

At Vanguard, they didn't extend their commission-free ETF pricing to the VBO accounts. The $7 commission for non-Vanguard ETFs applied, which was worth paying for choices I liked better. So I hope that TDA doesn't shut the SDBA's out of this like Vanguard did.

A nice yellow banner shows on the TDA page after logging in!

 

[braumeister]

From 1996:


We've come quite a long way.

 

[ckelly78z]

Before I realized that Schwab was implementing this today, I opened a new account yesterday to do a little bit of investing with some spare cash. I haven't loaded the account yet, but got good reviews for Charles Schwab that placed it ahead of most others while still paying the $4.95 transaction fees.

I hope to load $1000-$2000 to play with penny stocks in the NASDAQ, and see what kind of returns I can get.

 

[Car-Guy]

Now I'm understanding why their customer support has fallen off recently. I have a financial advisor assigned to my account (no fee) but he has become unresponsive. I probably only trade emails or talk to him 2 or 3 times a year but he never even responded to my last "2" emails. I asked for a new FA and got one assigned about a month ago and they apologized for their poor service. Got 500 free trades too. (Ha, that's now worthless)

 

[gwraigty]

Ally Invest has joined the party:

Ally Invest Cuts Trading Commissions

The last paragraph notes that Fidelity and Vanguard are still holding out.

 

[NW-Bound]

Now I'm understanding why their customer support has fallen off recently. I have a financial advisor assigned to my account (no fee) but he has become unresponsive. I probably only trade emails or talk to him 2 or 3 times a year but he never even responded to my last "2" emails. I asked for a new FA and got one assigned about a month ago and they apologized for their poor service. Got 500 free trades too. (Ha, that's now worthless)

I never felt the need to talk to anyone at any brokerage, so I never knew about the quality of this service.

I am sure they will soon have a robot advisor running on AI to provide any hand-holding.

It will only cost a bit of electricity (provided free by roof-top solar panels anyway), and no salary.

 

[OldShooter]

... The last paragraph notes that Fidelity and Vanguard are still holding out.

Actually that kind of makes sense for Vanguard. Since they are owned by their investors, if they start giving some investors below-cost service, it is other investors (like me) who end up paying. It makes sense to drop all fees as close as possible to the cost of providing each service but after that, it is simply robbing Peter to pay Paul. There are bigger considerations, like maintaining share to achieve economies of scale, but at the microeconomic level IMO it is desirable that people pay for the services they get.

 

[kcowan]

Schwab gets cheap money from cash balances (which should grow). What will Ameritrade and eTrade do to compensate?

 

[gwraigty]

We have about half of our non-employer assets at Fidelity and half at Schwab. I've been about equally happy with both, in offerings and service. I did give Fidelity a slight edge specifically because of their 2% Visa vs. the 1.5% Schwab Amex, and the higher rates available on cash balances, as mentioned in the linked article:

Online stock trading is free now. What that means for E-Trade and Charles Schwab

However, I do find this Fidelity comment (bolded by me) a bit lame:

The one major online broker that has yet to cut commissions to zero is mutual fund giant Fidelity. The company touts how it offers a higher rate of return to customers by automatically putting their excess cash into higher-yielding money market accounts — a service known as a cash sweep.

"It's interesting that Schwab, TD Ameritrade and E-Trade have deliberately chosen not to help the greatest number of their investors by automatically providing the highest interest rate on their cash sweep like Fidelity does," the company said in a statement to CNN Business.

I keep very little uninvested cash at Fidelity, but I do appreciate the higher rates anyway. I already use their commission-free ETFs, but would appreciate more to choose from there. I've read comments from others at other sites that indicate people are already transferring their accounts from Fidelity to either Schwab or TD Ameritrade mostly. I hope Fidelity takes this a little more seriously than they've been publicly letting on.

 

[catotx]

"It's interesting that Schwab, TD Ameritrade and E-Trade have deliberately chosen not to help the greatest number of their investors by automatically providing the highest interest rate on their cash sweep like Fidelity does," the company said in a statement to CNN Business.

Fidelity certainly didn't provide the highest interest rate on their cash sweep. The sweep MMFs available from Fidelity have the highest expense ratios among their MMFs (in the range of 0.42%).

If they claim they are providing the highest interest rate, then they should make the MMFs with ER 0.3% or lower available for sweep.

 

[gwraigty]

Fidelity certainly didn't provide the highest interest rate on their cash sweep. The sweep MMFs available from Fidelity have the highest expense ratios among their MMFs (in the range of 0.42%).

If they claim they are providing the highest interest rate, then they should make the MMFs with ER 0.3% or lower available for sweep.

Why do you say that? Fidelity allows a MMF as a cash sweep vehicle, unlike Schwab and, I suppose, E-Trade. Fidelity also recently increased the interest on their FDIC cash sweep option. This has nothing to do with the ERs.

My last Schwab statement showed that the cash sweep had a rate of .177%. My Fidelity MMFs that I use for the cash sweep had yields of over 1.6%. The FDIC rate was .94%.

 

[catotx]

Why do you say that? Fidelity allows a MMF as a cash sweep vehicle, unlike Schwab and, I suppose, E-Trade. Fidelity also recently increased the interest on their FDIC cash sweep option. This has nothing to do with the ERs.

My last Schwab statement showed that the cash sweep had a rate of .177%. My Fidelity MMFs that I use for the cash sweep had yields of over 1.6%. The FDIC rate was .94%.

My point was that Fidelity's statement wasn't entirely accurate ("highest interest rate on their cash sweep"). Fidelity has MMFs with higher interest rates (e.g. FZDXX) but they are NOT available as sweep. The reason these have higher interest rates is mainly because of their lower ERs.

But it's true that the other brokers don't easily allow MMF as a sweep vehicle. Nevertheless, I have heard that if you have substantial assets with TDA, you can get a MMF as your sweep vehicle. It could be the same at Etrade -- but I don't know.

 

[youbet]

You can work around Schwab's low sweep rates by manually buying and selling their MM fund. When they first lowered their sweep rates, I called multiple times and bitched to no avail. So, despite it being a bit of a pita, I simply do two transactions for every trade. If I buy a stock or fund, I sell the MM at the same time. If I sell a stock or fund, I buy the MM when the order clears.

If I was an active trader, I guess this could be a significant inconvenience. But I only do 20 - 30 trades a year, so not too big a deal.

 

[gwraigty]

My point was that Fidelity's statement wasn't entirely accurate ("highest interest rate on their cash sweep"). Fidelity has MMFs with higher interest rates (e.g. FZDXX) but they are NOT available as sweep. The reason these have higher interest rates is mainly because of their lower ERs.

But it's true that the other brokers don't easily allow MMF as a sweep vehicle. Nevertheless, I have heard that if you have substantial assets with TDA, you can get a MMF as your sweep vehicle. It could be the same at Etrade -- but I don't know.

Out of what Fidelity allows as compared to what other firms normally allow, it's a valid claim. Current rates for our cash sweeps are:

Fidelity joint brokerage - FZFXX 1.55%
Fidelity Roth IRAs - SPAXX 1.59%
Fidelity CMA and HSA (mine) opened earlier this year - FDIC .94%
Fidelity HSA (DH's) opened in August - FDRXX - 1.65%

(FDIC was the only option given for my HSA at the time. Later this month, Fidelity is supposed to be opening up MMFs as an option for previously opened HSAs. DH was able to choose one right at the start. I'll be changing mine to a MMF ASAP.)

Charles Schwab joint brokerage - .12%

TD Ameritrade SDBAs - FDIC .10%

E-Trade rates range from .01% to .35%, depending on balance